http://ssrn.com/abstract=380841, at 36 (“Insofar as antitrust is con- age] chance that the patent would be held invalid and the market would cerned, among the most problematic settlement agreements are those in become competitive . . . [T]hose payments are inherently anticompetitive. On which the infringement plaintiff pays the infringement defendant for that lat- expectation the patentee is payment for an advantage that it could not get ter’s abandonment of the market,” because such an “exclusion payment,” if it went to trial”). “keeps the rival out of the market and induces it to drop its suit in exchange 7 See, e.g. , id. at 2, 46–49 (arguing that “exclusion payments that exceed for a payment”). Id. at 46–47 (“[t]he reason the patentee is willing to make litigation costs should be deemed illegal per se). this payment is precisely because the settlement will permit it to exclude competition from the market, whereas if it went to trial there is a [percent- With Malice Toward None: tify a legal conclusion that a settlement with payments from the patentee is per se unlawful (according to the Lefflers), or pre- sumptively anticompetitive (according to Professor Shapiro). A Brief Rejoinder to If nothing else, this approach may help us to understand why the attack on “reverse” payments continues to flounder in the Leffler and Shapiro courts. In addition to the Schering-Plough decision from the FTC’s Administrative Law Judge discussed in my prior article, two fed- eral district courts have recently spoken—one dismissing a com- B Y K E V I N M c D O N A L D plaint based on a Hatch-Waxman settlement altogether; 3 the other refusing to find a settlement per se illegal, and noting that “so-called reverse payments are a natural by-product of the Hatch-Waxman process.” 4 Although one of these opinions W HEN ABRAHAM LINCOLN WAS ATTACKED in print covers 129 pages, neither embraces, or even mentions, the “probabilistic” property theory. 5 The principles that follow may by the eminent Horace Greeley, he began his response this way: explain why. Antitrust Laws Impose Only Negative Duties. One common I have just read yours of the 19th. addressed to myself through the mistake is to analyze competitive conduct New-York Tribune . If there be in it any statements, or assumptions as if the function of antitrust law were to compel firms to maximize of fact, which I may know to be erroneous, I do not, now and here, competition . . . rather than to prevent them from restricting it. controvert them. If there be in it any inferences which I may believe [On the contrary,] there is a difference between positive and to be falsely drawn, I do not, now and here, argue against them. negative duties, and the antitrust laws . . . have generally been If there be perceptible in it an impatient and dictatorial tone, I waive understood to impose only the latter. 6 it in deference to an old friend, whose heart I have always supposed Accordingly, a practice may not be condemned under Section 1 to be right. of the Sherman Act unless it reduces competition in the first As to the policy I “seem to be pursuing” as you say, I have not place. It is not enough to hypothesize an alternative that a plain- meant to leave any one in doubt. I would save the Union. 1 tiff regards as more competitive (e.g., a license). “It is the choice Lincoln, I think, understood that responding to the specifics of of an unreasonable alternative, not the failure to choose the least the attack, pointing out its liberties from the actual record of what restrictive alternative, that leads to liability.” 7 he had said and done, was less important to the public than a To avoid this fallacy, one cannot define the consumer harm firm understanding of his position. While I make no pretense to allegedly flowing from patent settlements as the Lefflers do: Lincoln’s higher virtues, nor to his matchless prose, I will also “It is clear that licensing agreement settlements which allow spare those of you who have read this far a detailed list of entry of the alleged infringer are preferable on a static welfare grievances as to how my ideas have been mangled. basis to lump sum patent settlements which sustain the exist- ing monopoly supply situation.” Leffler III at 78. 8 Thus defined, What I propose instead is a brief listing of four fundamental principles on which I believe my critics and I do disagree—a the harm that they purport to weigh against the conceded bene- subject about which the readers of the three pieces addressing fits of a settlement consists of the difference between the set- my article have a right to be confused. 2 This approach, I hope, will tlement chosen by the parties (payments) and the settlement give those readers a chance to form their own views—and, ide- they might have chosen (a license). Under the law, however, this ally, to formulate even better questions than we are asking about is not an anticompetitive effect at all. In the words of the Second the ultimate point: whether the “probability” that a patent may be Circuit: “The [agreement] is not even amenable to scrutiny under invalidated during litigation, however small, can be used to jus- Section 1 unless it is a restraint of trade. The fact that it may be in some sense ‘unnecessary’ does not make it a restraint.” 9 Professor Shapiro imposes positive duties with assertions like Kevin McDonald is a Partner at Jones Day, Washington, D.C. this: “[L]icenses are generally regarded as anticompetitive if S U M M E R 2 0 0 3 · 8 5
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